No full-text available
To read the full-text of this research,
you can request a copy directly from the author.
Equilibrium Price Dispersion in Retail Markets for Prescription Drugs
Abstract
This study seeks to establish the empirical importance of price dispersion due to costly consumer search by examining retail prices for prescription drugs. Posted prices in two geographically distinct markets are shown to vary considerably across pharmacies within the same market, even after one controls for variation due to pharmacy differences. Pharmacy heterogeneity accounts for at most one-third of the observed price dispersion. The empirical analysis hinges on the observation that consumers' incentives to price-shop depend on characteristics of the drug therapy. Cross-sectional patterns in price distributions across drugs are consistent with the predictions of a search model: prices for repeatedly purchased prescriptions (for which the expected benefits of search are highest) exhibit significant reductions in both dispersion and price-cost margins.
... In an early contribution, Pratt et al. ([21]) noted the existence of different prices in markets they describe as 'almost competitive'. Systematic evidence of price dispersion began to accumulate in the 2000s with studies of small numbers of products (Sorensen [23]; Lach [15]). The increased availability of large and detailed datasets has made it possible to study price dispersion using thousands or even millions of products. ...
... Understanding how stores tailor product assortments and prices to target specific consumer baskets is an interesting topic that warrants further investigation. of expensive products. 23 This latter assumption implies s = 1 for all stores and there is no store component, p s = 1. 24 With this as background, we now consider a consumer who buys n cheap products from n different stores. ...
... The store-specific basket is p i,s = 1 n c + n−1 n e for each store and this is also the value of p sb i . 23 Normalized prices take only two values in the following example: (a) all stores pay the same cost for each product, possibly varying from product to product, and then each store chooses a markup for each product that may be low or high; and (b) stores sell the same quantity share of low and high products. Since there is no temporal variation, we can omit without loss of generality the i sub-index on the transaction price P j,s , and we also have i,j,s = j,s . ...
We build on recent work that analyzes consumers’ ability to save by exploiting price dispersion in grocery stores. We show that store expensiveness varies across consumers depending on the basket they consume, meaning that consumers can save more by shopping at a store that is cheaper for their basket rather than at a store that is cheaper overall. We incorporate this insight into a new price variance decomposition that is a refinement of existing approaches. Our results show that the ability to buy products from the store where they are cheapest is much less important than previous work had found; rather, the ability to choose the cheapest stores for one’s basket is a more important source of variation in the prices consumers pay. Our approach also provides an informal test for competing theories modeling consumers as either shopping for products or shopping for categories, and finds support for both. We conclude that the idea of consumers choosing the right store for their basket has substantial traction and is a useful addition to our arsenal of models of consumer search behavior.
... Intuitively, one might imagine that price dispersion is most likely to survive under monopolistic industry structure, but less likely to survive as the structure grows more competitive, since a competitor will likely have the incentive to offer a plan type that is, in some sense, intermediate between those of its competitors when its competitors attempt to segment the market into two or more customer types. An increasing body of literature suggests that markets subject to competition can contain significant price dispersion for reasons unrelated to cost differences (see, for example, Borenstein (1985), Shepard (1991), Borenstein (1991), Borenstein and Rose (1994), and Sorenson (2000).) These papers analyze products that are relatively, but not perfectly, homogeneous and that contain multiple sellers, such as gasoline and air travel. ...
... As the expected gains from search grow, price dispersion will fall. In line with this theory, Sorenson (2000) finds that repeatedly purchased pharmaceutical prescriptions, for which one would expect the greatest benefit from search, have significantly lower price dispersion than other types of prescriptions. Most surprisingly, Borenstein and Rose (1994) note that there is a significant positive effect of competition on price dispersion. ...
This paper examines the relationship between changes in telecommunications provider concentration on international long distance routes and changes in prices on those routes. Overall, decreased concentration is associated with significantly lower prices to consumers of long distance services. However, the relationship between concentration and price varies according to the type of long distance plan considered. For the international flagship plans frequently selected by more price-conscious consumers of international long distance, increased competition on a route is associated with lower prices. In contrast, for the basic international plans that are the default selection for consumers, increased competition on a route is actually associated with higher prices. Thus, somewhat surprisingly, price dispersion appears to increase as competition increases.
... 1 Traditional literature has explained the existence of price dispersion for homogeneous products through imperfect information among consumers and sellers (Burdett and Judd 1983;Salop and Stiglitz 1982). To quote Sorensen (2000), Generally speaking, price dispersion will arise when there is a positive (but uncertain) probability that a randomly chosen customer knows only one price. Thus, even in markets with symmetric firms selling homogeneous products, prices may differ in equilibrium if consumers must incur search costs to obtain price information. ...
... On the contrary, the effect is negative when preferences are sufficiently certain, and products are heterogeneous. 3 To explain those empirical patterns, existing literature has either relied on heterogeneity or search costs or both Ellison 2009, 2018;Ellison and Wolitzky 2012;Honka, Hortaçsu, and Matthijs 2019;Sorensen 2000) to explain the existence of price dispersion in equilibrium. With the wider adoption of price comparison websites among consumers, several theoretical and empirical research has been done in the recent past to understand the price dispersion that persists even after the growth of the internet and the popularity of price comparison websites. ...
... The foremost and sensible strategy for decarbonisation is to abandon fossil fuels and replace them with renewable energy as the ultimate energy source. Renewable energy is ideal as a sustainable source because it is replenished by the sun at the rate at which it is used (Sorensen, 2000) [21] . The question that guided this study was: Why are institutions of higher learning in Zimbabwe not taking up renewable energy for their operations? ...
... The foremost and sensible strategy for decarbonisation is to abandon fossil fuels and replace them with renewable energy as the ultimate energy source. Renewable energy is ideal as a sustainable source because it is replenished by the sun at the rate at which it is used (Sorensen, 2000) [21] . The question that guided this study was: Why are institutions of higher learning in Zimbabwe not taking up renewable energy for their operations? ...
There are many financial, institutional, technological and socio-cultural barriers that inhibit institutions of higher education from moving from the pollutant fossil fuels to the renewable energy pathway. But given the prominent position of academia in sustainability studies, it is natural to expect institutions of higher education to take a lead in sustainable practices including clean energy use. The study adopted a qualitative approach and a case study design. Structured interviews were used to collect data from purposively sampled participants which was thematically analysed. This research revealed that social, technological and the lack of policy regulation of the use of renewable energies stood as barriers with a strong sway on the failure of institutional adoption of clean energy. The current higher education landscape which benefits from fossil use, the lack of accountability of institutions to declared commitments and the lack of technical know-how become a hindrance to redirected changes for uptake of solar based solutions. The study recommends that with less polluting and lower tariff energy solutions being made available for adoption to institutions of higher learning, this will create a situation where renewable energy solutions will be an attractive option leading to solar renewable energy uptake.
... O CV tem a utilidade de medir a heterogeneidade ou a homogeneidade que se observa na distribuição dos valores de uma variável aleatória em torno do seu valor esperado. (GOMES, 1985;GARCIA, 1989;SORENSEN, 2000;VAZ et al, 2017). ...
... Ainda permite a comparação de desigualdades ou de heterogeneidades entre variáveis aferidas em diferentes unidades de medida. (GARCIA, 1989;O'REILLY et al, 1989;WIERSEMA, BANTEL,1993;SORENSEN, 2000;FAO, 2006;FAO, 2014). ...
Investigou-se o papel do capital humano sobre a produtividade do trabalho nos estados brasileiros entre 2004 e 2015. Capital humano foi medido por duas variáveis: Escolaridade e saúde preventiva. Estimou-se a sinergia de variações de capital humano e produtividade, bem como a relação os impactos das diferenças de capital humano sobre produtividade do trabalho entre os estados. Os resultados mostram que os estados do Sudeste/Sul, mais ricos tem produtividades e capital humano maiores do que os do Nordeste/Norte, mais pobres. Mostraram que Capital humano e produtividade covariam e que diferenciais de capital humano induzem diferenciais de produtividade entre os estados.
... Maiores CV sinalizam maiores instabilidades relativas. Quanto menor o CV, mais homogênea (estável) será a distribuição das observações em torno da média (GOMES, 1985;GARCIA, 1989;SORENSEN, 2000). ...
... Gomes (1985) Uma vantagem de usar o CV nesse tipo de avaliação, em relação a outras medidas de variabilidade, é que permite a comparação entre variáveis de naturezas e aferições distintas. (GARCIA, 1989;SORENSEN, 2000). ...
... See, e.g.,Sorensen (2000),Menzio and Trachter (2015), andKaplan et al. (2019); the last two estimated a standard deviation of prices for transactions at around 15% for non-durable consumption goods. 2 SeeFoster et al. (2016). 3 SeeFoster et al. (2008Foster et al. ( , 2016. 4 For example,Besanko et al. (2014) andBesanko et al. (2019).Content courtesy of Springer Nature, terms of use apply. ...
This paper develops a dynamic model of price competition where buyers have con- strained consideration sets due to unawareness. There are two sellers: an incumbent, that is initially more well-known among buyers; and an entrant. Awareness is influenced by word-of-mouth: If more buyers choose to shop at a seller, unaware buyers are more likely to discover that seller. In the unique equilibrium, both sellers randomize their pricing strategies, but one seller posts higher expected prices than the other. I show that if the incumbent’s present actions can change the future state of the market to a high enough degree, the incumbent has a strong incentive to undercut the entrant. Thus, this model provides microfoundations for the concept of an “advantage denying” motive and relates it to the empirical finding that time is required for a seller’s demand to grow.
... Thus, choosing to use the coefficient of variance in this evaluation method instead of other measures of variability makes it possible to compare disparities or instabilities between variables measured in different units 24,23,25,26,27,28,29,30. ...
This research assesses rainfed agricultural production in the state of Pernambuco, which has 137 of its 185 municipalities officially characterized as being part of the semi-arid climate regime. The study classified rainfall periods in Pernambuco between 1944 and 2022 and investigated rainfall instability and its impact on aggregate productivity, aggregate harvested area and production value per hectare of bean, cassava and maize crops. The Auto-Regressive Integrated Moving Average model with Exogenous Variable Inputs (ARIMAX) was used, considering rainfall as an exogenous variable. The results showed that rainfall has a direct effect on the variables investigated, especially the harvested area. It was proven that in periods classified as normal and rainy, productivity, harvested area and production value per hectare showed higher results than those observed in the dry periods of, as was the assumption of the research. The study also confirmed that the models developed were parsimonious and capable of predicting the variables investigated. The results showed that productivities, harvested areas and production values per hectare for beans, cassava and corn experienced greater instability during periods of drought. The research also shows that the aggregated production values per hectare for the three crops are very low. In dry years, they are even lower than the minimum wage. This result confirms that the rural areas of Pernambuco where these crops are mostly grown are very poor
... The brand drug company's current assets to current liabilities ratio (Tuli and Bharadwaj, 2009) Compustat Price difference b Difference between the price of the brand drug and the average price of all brand drugs included in the specific therapeutic class (Sorensen, 2000), natural-log transformed ...
Purpose
Pharmaceutical marketers use detailing, sampling and direct-to-consumer advertising (DTCA) to promote a branded prescription drug (brand drug) to health-care professionals and consumers. These promotion mix elements help raise brand awareness, increase prescription likelihood and guard a product market against competing brand drugs. However, the extent to which these elements remain effective when a brand drug goes off patent and its marketing exclusivity expires, allowing low-price generics to enter the market, remains unclear. This study aims to explore the effectiveness of promotion mix elements before and after the market entry of a generic drug.
Design/methodology/approach
The authors collected and analyzed a panel data set of 41 brand drugs from 7 therapeutic classes between 2007 and 2014 (3,201 observations) using the two-stage control function approach to address potential endogeneity.
Findings
The effectiveness of promotion mix elements changes significantly, but not in a universally uniform way, during a market transition. Detailing and DTCA are increasingly effective after a brand drug’s generics enter the market. In contrast, sampling is more effective before the market transition. The positive effects of sampling on brand sales are stronger when the price of a brand drug is higher than the average price of its competing brands. Sampling also helps amplify the positive influences of detailing and DTCA on brand sales.
Research limitations/implications
This study shows that pharmaceutical promotion is not equally effective in the brand drug market with/without generic competitors. Detailing and DTCA are increasingly effective when generic competition intensifies. In contrast, the distribution of free drug samples is less effective after more generic drugs enter the market.
Practical implications
Incumbent brands’ promotion expenditures often drop dramatically when the expiration of their patents is near, a practice that likely continues after generics enter the market. Taking into consideration these industry norms and their findings, the authors suggest that promotional decisions during a market transition should not overly focus on cutting promotional expenditures across the board. Since a firm’s promotional expenditure tends to be expensive, factoring in information on the effectiveness of each promotion mix element helps marketers make well-informed strategic decisions on resource allocation during the transition from a market without generics to a market with generics.
Originality/value
Previous studies do not explicitly account for structural changes in the brand drug market over time. However, the expiration of patent and marketing exclusivity marks a transitional period in which a brand drug eventually competes with its generic counterparts. Given the criticality of such structural change, the authors examine brand drugs’ promotion effectiveness in the presence of their generic counterparts.
... Making models where firms set prices consistent with the observed distribution of prices requires explicit or implicit assumptions of product heterogeneity, such as postulating that buyers assign different reservation prices to different sellers. Some authors use the concept of "amenities" provided by individual sellers to explain this assumption of heterogeneity (see, e.g., Sorensen (2000) and Kaplan and Menzio (2016)). ...
In product markets, substantial price dispersion exists for transactions of physically identical goods. Moreover, in these markets, incumbent firms sell at higher prices than entrants. This paper presents a theory of price formation under dynamic competition that explains these facts by assuming both that consumers have imperfect access to firms and that their degree of access depends on each firm’s sales history. The model has a unique equilibrium that features randomized pricing strategies, with incumbents always posting higher prices than entrants. For a fixed underlying environment, the equilibrium converges to a stationary equilibrium over time. As firms’ entry and exit rates approach zero, this stationary equilibrium converges to perfect competition.
... An increasing body of empirical literature suggests that markets can contain significant price dispersion for reasons unrelated to product cost differences (see, for example, Borenstein, 1985Borenstein, , 1991Borenstein & Rose, 1994;Shepard, 1991;Sorenson, 2000). A common theory underlying the work is that consumer search costs explain the price dispersion. ...
Discussion of the policy aspects of new communications technologies and their associated institutions.
New technologies, although developed with optimism, often fall short of their predicted potential and create new problems. Communications technologies are no different. Their utopian proponents claim that universal access to advanced communications technologies can help to feed the hungry, cure the sick, educate the illiterate, improve the global standard of living, and ultimately bring about world peace. The sobering reality is that while communications technologies have a role to play in making the world a better place, the impact of any specific technological advance is likely to be modest. The limitations of new technologies are often not inherent in the technologies themselves but the result of regulatory or economic constraints. While the capability may exist to deliver any information anywhere in the world, many people lack the money to pay for it, the equipment to access it, the skills to use it, or even the knowledge that it might be useful to them. This book examines the complex ways in which communication technologies and policies affect the people whose lives they are intended to improve. The areas of discussion include Internet regulation, electronic voting and petitioning, monopoly and competition in communications markets, the future of wireless communications, and the concept of universal service.
... O CV afere a forma como os valores observados da variável se dispersam em torno da sua média. Maior o CV, mais heterogênea será a distribuição dos valores da variável em torno da sua média (SORENSEN, 2000). ...
... Deviations from the law of one price have been thoroughly studied in the past only for limited markets (e.g., Asplund and Friberg (2002), Sorensen (2000), Hong and Shum (2006), Moraga-González and Wildenbeest (2008), Woodward and Hall (2012)) due to data unavailability on a larger scale. Even, CPI price records, which have become available to researchers in the last 20 years, typically do not contain the necessary information to make an exact comparison of the same product across stores (i.e., its barcode). ...
We investigate whether prices for identical products differ across more than 1600 French supermarkets and find non-trivial price dispersion, albeit more limited than in other countries. We determine that more than 80% of the total variance of the observed dispersion of relative prices across stores and time is explained by the spatial permanent component (stores consistently sell products at relatively high or low prices), essentially driven by persistent heterogeneity in retail chain pricing. The analysis of between and within retail chain price dispersion also provides evidence consistent with a rather centralized multi-stage price setting, in which local stores play a much smaller role than retail buying groups and local branches.
... Economists give four popular explanations for the existence of a price dispersion: amenities, heterogeneous costs, intertemporal price discrimination and search costs. The first explanation suggests that identical products sell at different prices because they are bundled with different amenities in different transactions (Sorensen, 2000). The second states that firms at different locations have different costs causing prices to vary for similar goods (Golosov and Lucas, 2007). ...
Derived is an analytic dynamic model of the price distribution of consumer goods in retail markets. The stationary price distribution is established from the conservation equation of offered units and two simplifying assumptions. Under the condition that independent traders make small random price variations around a nearly constant supply price, the stationary price distribution of a good must have the form of a fat-tailed Laplace distribution. The standard deviation of the distribution is determined by the price volatility of the goods. Also, the price distribution of an ensemble of goods is established and applied to empirical data with good quantitative agreement.
... The mechanism we highlight is that a decrease in the transportation cost lowers the price and buyers have a higher expected payoff from not reading contracts; firms then take advantage of this and offer the low-quality product with an increased probability. Broadly, our results suggest that e-commerce, which can be associated with lower prices (Brynjolfsson and Smith 2000, Sorensen 2000, Brown and Goolsbee 2002 and are typically characterised by lower travel costs than offline markets are likelier to be associated with quality reduction (and hence unfair surprise). This is echoed by the legal literature (Marotta-Wurgler 2011, Marotta-Wurgler and Taylor 2013, Smith 2016) in suggesting that trade in online markets should be subject to increased scrutiny, as these markets might potentially be characterised by buyer-unfriendly fine print. ...
One of the ways product quality uncertainty can be resolved is via its associated standard form contract that is written in fine print. This is costly to read and interpret and buyers often purchase products without reading them and consequently, a monopolist never has an incentive to offer high quality terms. We investigate whether competitive forces can force a better outcome for quality. We set up a Hotelling-type linear city framework where competition is measured via changes in buyers’ transportation costs. Benchmark duopoly does not guarantee high quality terms to be offered. Surprisingly, increased competition via lower transportation cost lowers firms’ prices and also their probability of offering high-quality products. This can also be detrimental to welfare.
... It has been shown that price dispersion tends to increase when the number of suppliers is low (Baye, Morgan & Scholten, 2004;Dahlby & West, 1986) and in times of strong inflation (Van Hoomissen, 1988). Other studies find that price dispersion tends to be lower for consumer goods that are regularly repurchased (Sorensen, 2000) and for goods in mature markets (Baye, Morgan & Scholten, 2006). Moreover, deviations from the equilibrium price model are also observed within one supplier. ...
The neoclassical market model continues to have a major influence on important
economic policy decisions. In this model, the formation of equilibrium prices at the
intersection of the aggregated supply and aggregated demand functions plays a central role. We examine whether the formation of equilibrium prices actually occurs. To do so, we analyze 2,217 prices for homogeneous products recorded by students in stores and online between October 2020 and May 2022. In 143 out of 146 cases, no equilibrium price emerges. The percentage price range regularly exceeds 100%. The presumed steering function of an equilibrium price does not materialize. The establishment of market mechanisms for the efficient solution of economic problems must therefore be questioned.
... The benefits of searching are larger for items that account for a larger share of the consumer's budget, or that are purchased with a higher frequency, as have been noted in earlier studies on search costs literature (e.g. Sorensen 2000;Stigler 1961). This is precisely the case for diesel cars users (Johnson 2002): they have stronger incentives to search for lower fuel prices than gasoline cars users due to (i) the more intense use of diesel cars, and (ii) the higher upfront price of a diesel car. ...
This paper analyses the impact of local competition on gasoline and diesel pricing at branded and unbranded independent service stations. Based on our theory-driven discussion we derive a number of hypotheses, which are empirically tested on a sample of service stations in Spain. In Spain, retail prices of motor fuels have been under the spotlight since the dismantling of the state monopoly in the 1990s. The concentration of the retail market and the behavior of the main oil operators are of constant concern to the competition authorities. Our empirical analysis provides evidence for the existence of different competitive dynamics between branded and unbranded stations, and between gasoline and diesel retail pricing. Specifically, the results show that (i) fuel prices at branded (unbranded) service station are positively (negatively) associated with the number of stations operating in the same local market, (ii) prices of both motor fuels at a branded station are higher the larger the share of stations carrying the same brand in its local market, (iii) diesel price at an unbranded station is lower the larger the share of unbranded stations in its local market, and (iv) unbranded service stations undercut the price of diesel more than that of gasoline compared with prices at branded stations.
... In the case of buying medicines, if the FDA approves that the products under the same generic name are identical, these generically equivalent products actually should have very little variation in prices. However, the price of the generic drugs often varies greatly, even in an environment convenient for economic competition (Pentrakan, Yang, & Wong, 2021), and the wide price distribution among buyers is often caused by a lack of information (Sorensen, 2000). Many purchasers may buy at higher than the lowest price available because of various reasons, such as information asymmetry, single vendor, higher search costs, and inelastic demand (Jauhar, Sulistyanto, & Laksono, 2018). ...
A centralized electronic bidding (e-bidding) system has recently become a key government strategy in developing
mechanisms for public drug purchasing systems in Thailand. From the previous literature, e-bidding can be an effective tool for
controlling the purchase price of a product in various industries. However, this system is still uncommon in pharmaceutical
procurement. Thus, this study aims to determine the impact of the e-bidding system on the pricing of generic medicines. Drug
procurement data from Thailand for all generic products of omeprazole injection from 2018 to 2019 were used to analyze drug
price changes before and after the adoption of the e-bidding system. The results showed that the effect of the e-bidding system
was consistent with a 17.35% drop in the mean prices. In addition, the distribution of purchase prices was greatly reduced
compared to the traditional system.
... The greater the magnitude of the CV, the more unstable or more heterogeneous will be the distribution of observed values of a random variable around its mean. Thus, the CV can also be used as a risk measurement and has the additional advantage to compare the variables measured in different measurement units [23][24][25][26]. ...
... (Bergman et al., 2012) estimate that, in 2012, 70% of consumers purchased the product of the month, and 11% of pharmaceutical purchases were the result of patients or physicians opposing substitution. Although search costs are an important determinant of demand in many pharmaceutical markets and can result in price dispersion across drugs (Sorensen, 2000), search costs are not relevant behavioral frictions in the Swedish market. Within the Swedish market, patients get dispensed the cheapest available generic by default. ...
This paper investigates price patterns of off-patent pharmaceuticals in Sweden. I show that price dynamics are dependent on the number of competitors in the market. The price patterns follow predictions from a model of dynamic price competition in which the demand for pharmaceuticals incorporates the known biases of consumers: habit persistence and brand preferences. Using the regulated market of Swedish pharmaceuticals, I show that price dynamics may help in identifying possible tacit collusion by manufacturers in markets where consumers experience behavioral frictions.
... Clay, Krishnan, & Wolff, 2001), pharmaceuticals (e.g. Sorensen, 2000) and for many other goods and services in the economy (e.g. Crucini & Yilmazkuday, 2014). ...
Purpose
Over the past decades, the global solar photovoltaic (PV) market has experienced an unprecedented development associated with a substantial decline in solar PV module prices. A body of literature has attempted to identify and evaluate the different sources of price variation. However, the impact of international trade on the price of solar PV modules has not yet been empirically examined. This paper contributes to filling this gap in the literature by providing a comprehensive empirical examination on the relationship between international trade and solar PV module prices.
Design/methodology/approach
The author uses a sample of 15 countries over the period 2006–2015 and proposes a linear dynamic panel data model based on a new specification, including a number of relevant factors influencing solar PV module prices.
Findings
The empirical analysis reveals that an increase in imports of solar PV cells and modules is associated with a decline in solar PV module prices. This finding suggests that international trade could lead to further price reductions, thus fostering the deployment of solar PV technology. The study reveals several other important findings. Market and technological development are key factors explaining the decline in solar PV module prices. Moreover, government policies such as public budget for R&D in PV and feed-in tariff for solar PV are effective in reducing the price of solar PV modules.
Originality/value
This paper examines the influence of international trade, government policies, market development and technological development on solar PV module prices. The results may be of interest to both academic research and policy analysis.
... Quanto maior a magnitude do CV, mais instável ou mais heterogênea será a distribuição dos valores observados de uma variável aleatória em torno da sua média. Sendo assim, o CV também pode ser utilizado como medida de aferição de risco, além disso, tem como vantagem adicional de permitir a comparaçãoentrevariáveis aferidas em unidades de diferentes medidas (GARCIA, 1989;GOMES, 1985;SANTOS;DIAS, 2021;SORENSEN, 2000). ...
... This phenomenon is not surprising; the main motivation for customers to use an online intermediary is to find the lowest price. Empirical results indicate that price dispersion is derived from the information search cost for a wide range of industries, including the online book industry (Clay et al., 2001), automobile insurance industry (Dahlby & West, 1986), life insurance industry (Brown & Goolsbee, 2002), and prescription drug industry (Sorensen, 2000). ...
Price dispersion is an important indicator of pricing strategy and market efficiency. However, the relationship between price dispersion and sales has not been explored, especially for durable goods such as automobiles. In this study, we use a unique data set from Autohome comprising the actual transaction prices of buyers to assess the extent of price dispersion in the new automobile market. Based on an empirical analysis of over 222,592 price observations for 59 vehicle models collected over a period of 48 months, we find that the percentage difference ( PD) and coefficient of variation ( CV) of new automobile transaction prices are 43.4% and 9.9%, respectively. In addition, the empirical results show that the price dispersions lower for non-sedan type, Chinese car brands, and produced by state-owned companies. We further investigate whether the increase in the price dispersion of a new automobile has a positive impact on automobile sales using a multiple quadratic regression model. The findings show that price dispersion has positively impact of sales. More interestingly, negative quadratic effects are observed, indicating a concave-down-increasing relationship between price dispersion and sales. This implies that an extreme price dispersion is less helpful than a moderate price dispersion. These findings advance knowledge of consumer buying behavior and seller pricing strategies, with important theoretical contributions and practical implications for automobile companies.
This chapter develops the theoretical 2TSF model for the effects of incomplete information on both sides of a market. We show how it links to the abstract definition of a two-tier frontier and proceed to derive the corresponding empirical model. We apply the model to the housing market.
Using a novel approach to identifying mortgage price shopping on the universe of mortgages from 2018 to 2020, we find that relatively few borrowers shop, but those who do end saving roughly 11 basis points on average. We also find significant differences by race in the incidence and benefits of shopping. When borrowers do shop, a vast majority engage in simultaneous search. Shoppers show a swifter movement away from commercial banks toward fintechs. Shoppers tend to be more creditworthy, wealthier, live in more urban areas, and apply more often with nondepository lenders. Minority shoppers show less affinity to minority‐owned lenders than corresponding nonshoppers. We also provide evidence that shopping is likely significantly overreported in available survey data.
To what extent do firms know available information on key competitor decisions, and how does competitor information change their own strategic choices? These questions are fundamental to understanding how firms compete and make strategic decisions, yet systematic evidence on them remains limited. I designed a field experiment across 3,218 differentiated firms in the personal care industry, where firms randomly assigned to treatment received easily accessible information on competitor prices. At baseline, nearly half of treatment firms appeared to lack knowledge of competitor prices. Once treatment firms received competitor information, they were more likely to change their own decisions, aligning them with competitors rather than differentiating. These changes were driven by firms that were more misaligned in their price and quality decisions, and appear to have been performance enhancing. If competitor information was both easily accessible and decision relevant, why did firms not use this information on their own? Results from a follow-up experiment suggest that this lack of knowledge may have been driven by managerial inattention. These findings highlight that limited information processing is a key problem for firms and a central issue in strategy, and raise the possibility that growing availability of competitor data may lead firms to align their decisions more with their competitors.
This paper was accepted by Alfonso Gambardella, business strategy.
Funding: H. Kim is grateful for the support of Harvard Business School, the Foundations of Human Behavior, the Ewing Marion Kauffman Foundation, and Yelp.
Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.04062 .
Objetivo: Este artigo analisa como as ofertas com cashback e a estrutura de mercado influenciam os níveis de dispersão de preços em sites de comparação no comércio eletrônico brasileiro. Método: Com uma base de 210 observações extraídas de sites brasileiros de comparação de preços, desenvolvemos quatro modelos de Análise de Regressão Múltipla com termo interativo, para testar as cinco hipóteses do estudo. Resultados: Suportamos cinco hipóteses que revelam como a dispersão de preços é influenciada por estratégias diferenciadas de preços no comércio eletrônico. Como resultado principal temos que a presença de um maior número de ofertas com cashback em uma lista de preços está associada a níveis ampliados de dispersão de preços nos sites de comparação. A introdução de novos concorrentes exerce uma influência redutora sobre a dispersão de preços, em virtude da maior transparência e competitividade resultantes. Contribuições teóricas: Este estudo contribui no campo dos estudos de marketing voltados para estratégias de precificação, com destaque para a dispersão de preços relacionada à estratégia de cashback no ambiente do comércio eletrônico. Implicações gerenciais: Com os resultados da pesquisa, os gestores de preços de sites de comparação e de lojas terão informações mais transparentes para administrar a implementação da estratégia de cashback. Originalidade: Distinto dos estudos anteriores, que estudam a dinâmica de preços no ambiente digital, nosso estudo acrescenta evidências da influência da estratégia cashback a essa dinâmica em sites de comparação de preços.
The introduction of the Beijing–Shanghai high-speed rail (Launch) and the Wenzhou bullet-train collision (Crash) in China provided a unique occasion to study the effect of competition on price dispersion. Results show that price dispersion increased by about 48% after the Launch, as airlines offered greater discounts to price-elastic consumers than to price-inelastic consumers. By contrast, price dispersion decreased by about 55% after the Crash, as airlines raised prices more for price-elastic consumers than for price-inelastic consumers.
We study how investment fees vary within private equity funds. Net‐of‐fee return clustering suggests that most funds have two tiers of fees, and we decompose differences across tiers into both management‐ and performance‐based fees. Managers of venture capital funds and those in high demand are less likely to use multiple fee schedules. Some investors consistently pay lower fees relative to others within their funds. Investor size, experience, and past performance explain some but not all of this effect, suggesting that unobserved traits like negotiation skill or bargaining power materially impact the fees that investors pay to access private markets.
This article seeks to quantify the importance of price information in reducing consumer search costs and equilibrium price dispersion in a competitive setting. It exploits a natural experiment in the retail gasoline industry in which stations post the prices of only certain grades of gasoline on large street‐side signboards, and not others, except where required by law. Differential‐by‐grade signboard information predicts a specific curvature in price dispersion across grades, and differentiates itself from other noninformational factors such as income and cost. The impact of readily‐available price information on search and price dispersion is found to be exceptionally large.
I examine the role of costly consumer search for the pricing of deposits. Estimates of a model of heterogeneous search cost households reveal a large fraction of high‐search‐cost depositors composed of elderly and less financially sophisticated households. Those households grant banks significant monopoly power that results in low and asymmetric interest rate pass‐through. The predictions of the estimated model are consistent with responses in the Survey of Consumer Finances to questions related to financial sophistication, search for investment return, and deposit allocations across multiple bank accounts. The estimated model also reveals a nonmonotone relationship between bank entry, deposit rates, and consumer surplus.
This study considers the functioning of the market for recreational marijuana during its transition to legal status in Colorado and Washington State. Contrary to the expectation that moving from covert to legal status generates a freer flow of information that improves market functioning, we find that the measures we consider, price dispersion and the incidence of low-quality deliveries (‘rip-offs’), both show statistically and economically significant increases, reflecting worsening market functioning. We attribute this adverse outcome to the partial nature of the initial decriminalization, which maintained sanctions against selling, even while legalizing purchase and possession of small quantities. Our results also confirm that purchases increased with decriminalization. An influx of unsophisticated new buyers would create a less-informed average customer; a less-informed customer pool is consistent with poorer market outcomes, especially when dealers must continue to keep transactions secret. This work contributes to the empirical price dispersion literature, providing results consistent with the hypothesis that price dispersion increases when participants are less informed, but inconsistent with the prediction that price dispersion decreases with lower cost of price information. It also provides further evidence consistent with the importance of ‘rip-off’ transactions that has been highlighted in the literature on covert markets.
A produção de soja avança significativamente a partir dos anos noventa na região do MATOPIBA, composta pelos Estados do Maranhão, Tocantins, Piauí e Bahia. Este trabalho objetiva simular a capacidade de produzir soja de forma sustentável naquela região, sem que novas áreas sejam desmatadas e tampouco avancem sobre as áreas destinadas à produção dos agricultores familiares. Utilizam-se dados da Produção Agrícola Municipal do IBGE no período de 1990 a 2016. Elaboram-se simulações em que se impuseram limites máximos para as áreas a serem colhidas com soja nos estados, de tal sorte que não avancem sobre aquelas dos agricultores familiares e não ultrapassem um valor teto simulado. Impõe-se assim que o crescimento da produção de soja na região, a partir daquelas áreas superiores, aconteça apenas via crescimento da produtividade por hectare. Cria-se o índice de sustentabilidade (ISUS) usando método de análise fatorial com a técnica de decomposição em componentes principais. Testam-se as diferentes simulações de respostas entre os diferentes estados no que se refere aos valores médios do ISUS e simula-se a sua provável taxa de crescimento no período investigado que foi de 1990 a 2016. Os resultados obtidos mostram ser possível produzir soja nessa região, com TGC positivas, sem que se avance em áreas ainda não desmatadas e/ou ocupadas pelos agricultores familiares. Isso é possível porque as produtividades que permitem obter esses resultados foram observadas nos estados nos anos que compõem a série histórica analisada. Conclusão geral da pesquisa: é possível cultivar soja de forma sustentável na região do MATOPIBA. Palavras-Chave: Desenvolvimento Rural Sustentável. Agricultura Familiar. Modernização agrícola. Preservação ambiental.
Imperfect and costly information generates price dispersion in the market. This study employs data on housing assets listed for sale on a leading online classified home service in Israel to assess the effect of quality-adjusted housing price dispersion on time-on-market. Using survival analysis estimation, we find evidence that the hazard rate of sale significantly decreases with quality-adjusted price dispersion: a 1% increase in the standard deviation of the quality-adjusted housing price is associated with a decrease of about 0.63% in the likelihood of a sale. Results are robust to a series of model and sample specifications. As information is associated with decreased price dispersion in the market, our study supports the call for increased availability of information in real estate markets that would decrease time-on-market and transaction costs associated with the time, search, and negotiation required for achieving a transaction.
We investigate how consumer information affects price adjustment in the Austrian retail gasoline market. Our measure of consumer information is obtained from detailed census data on commuting behavior, as commuters can freely sample prices on their commuting route and are thus better informed about prices. A threshold error‐correction model suggests that prices adjust more quickly if cost shocks exceed certain thresholds. Parametric and semi‐parametric regressions show that a larger share of informed consumers increases both transmission speed and pass‐through rate, but has no effect on the asymmetry of cost transmission.
Where consumers have imperfect i nformation about specific firms' prices and lack information about the market, f irms have informational market power. In general, improving the consumers' infor mation about each firm's price will not necessarily lower the average market pri ce. The authors show however that certain types ofimprovements will lower price. Moreover a reduction in barriers to entry (e.g., capital costs) will lower pri ce, holding information constant. Where a significant number (but not all), cons umers have perfect information, single-price equilibria are impossible. Copyright 1986 by Royal Economic Society.
It is shown that wquilibria with dispersed prices exist in environments with identical and rational agents on both sides of the market. In particular, the original Stigler model of nonsequential search often has many equilibria, some with price dispersion. Also, price dispersion holds in equilibrium in general if search is "noisy," i.e., there is some chance of learning two or more prices when an agent is looking for one price.
The Netherlands introduced a new health insurance system in January 2006, a system based on managed competition. Such a system critically hinges on consumers that search. It is for this reason we think it is important to investigate the extend to which consumers search, how they search and why they search ´or don’t search. The price dispersion observed in the insurance market after the reform suggests the number of consumers that searches is low. We set up a search model for insurance that includes the main features of the Dutch health insurance market after the reform and test the hypotheses from this model on the data.
In this paper a method of estimating the parameters of a set of regression equations is reported which involves application of Aitken's generalized least-squares [1] to the whole system of equations. Under conditions generally encountered in practice, it is found that the regression coefficient estimators so obtained are at least asymptotically more efficient than those obtained by an equation-by-equation application of least squares. This gain in efficiency can be quite large if “independent” variables in different equations are not highly correlated and if disturbance terms in different equations are highly correlated. Further, tests of the hypothesis that all regression equation coefficient vectors are equal, based on “micro” and “macro” data, are described. If this hypothesis is accepted, there will be no aggregation bias. Finally, the estimation procedure and the “micro-test” for aggregation bias are applied in the analysis of annual investment data, 1935–1954, for two firms.
In this paper a method of estimating the parameters of a set of regression equations is reported which involves application of Aitken's generalized least-squares [1] to the whole system of equations. Under conditions generally encountered in practice, it is found that the regression coefficient estimators so obtained are at least asymptotically more efficient than those obtained by an equation-by-equation application of least squares. This gain in efficiency can be quite large if “independent” variables in different equations are not highly correlated and if disturbance terms in different equations are highly correlated. Further, tests of the hypothesis that all regression equation coefficient vectors are equal, based on “micro” and “macro” data, are described. If this hypothesis is accepted, there will be no aggregation bias. Finally, the estimation procedure and the “micro-test” for aggregation bias are applied in the analysis of annual investment data, 1935–1954, for two firms.
Where consumers have imperfect information about specific firms' prices and lack information about the market, firms have informational market power. In general, improving the consumer's information about each firm's price will not necessarily lower average market price. We show, however, that certain types of improvements will lower price. Moreover, a reduction in barriers to entry (e.g., capital costs) will lower price-holding information constant. Where a significant number (but not all) consumers have perfect information, single-price equilibria are impossible.
Thesis (Ph.D.)--Massachusetts Institute of Technology, Dept. of Economics, 1999. Includes bibliographical references (p. 97-100). by Alan T. Sorensen. Ph.D.
This paper considers the question of whether observed price differe ntials reflect perceived differences in quality, service agreements, or location, or whether information imperfections can explain this phenomenon. It sets out theoretical arguments linking inflation to reductions in the information stock held by agents and thus to greater price dispersion. The hypothesis is tested using monthly price data for thirteen uniquely-defined goods sold in Israel between 1971 and 1984. Price dispersion is shown to be positively related to the rate of market price inflation. Since inflation is an unlikely proxy for changes in perceived characteristics, the findings support price dispersion theories based on "optimally imperfect" decision making. Copyright 1988 by University of Chicago Press.
From automobile insurance data for Alberta over the period 1974-81, we find thatpremiums are highly correlated across driver classes in a given year, but that premiums for a given driver class are not correlated over a period of more than 5 years. Firms' relative market shares among drivers over age 25 and married males under 25 are inversely related to their deviations from the mean premiums.In these driver classes, the variance of real premiums decreases with the numberof firms in the market and increases with the real loss cost per car insured and the number of cars insured. From these results we conclude that the price dispersion in automobile insurance in Alberta is based on costly consumer search.
An explicit solution of an equilibrium model with price-setting firms and searching customers makes possible a number of comparativestatics predictions about how cost differences among firms, search costs of customers, and taxes will affect the mean and variance of the distribution of market prices. Another implication of the model is that a firm's demand depends on the difference between its price and the average price in the market.
The identification of sellers and the discovery of their prices is given as an example of the role of the search for information in economic life.
I. Introduction, 189.—II. Equilibria in models without learning—the case of knowledge, 191.—III. Equilibrium in models with
learning, 196.—IV. Empirically observed distributions of prices quoted by different sellers, 204.—V. Qualifications, implications,
and conclusions, 205.
The authors analyze a search-theoretic framework in which consumers buy the product repeatedly and firms' costs vary over time. They show the cross-sectional correlation between profits and firm size, the persistence of profits over time, and the role of consumers' immobility in determining firms' profits. In contrast with previous explanations of these phenomena, which are based on differences in inherent productive efficiencies, firms in the authors' model have the same efficiencies but some firms are more successful ex post which affects their subsequent (pricing) behavior and enables them to sustain their privileged position. In particular, large and more profitable firms raise their prices more moderately when their costs increase. Copyright 1995 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
I present tests of a competitive rationale for price promotions. In a model with a population of informed and uninformed customers, price competition yields a static equilibrium in which each seller draws a price from a specified density function. Price data on coffee and saltine crackers products are used to test whether the sample of prices on each product could have possibly come from the theoretically specified density function. The results suggest that some markets are indeed consistent with the marginal distributions of prices predicted by the model. Furthermore, in the process of testing this rationale for price promotions, estimates are obtained for the marginal cost of each product, the number of competing goods, and the percentage of informed consumers. The resulting excess variability of these estimates across competing brands can also raise questions with respect to the empirical validity of the model. Copyright 1995 by MIT Press.
N identical stores compete by choosing prices for a homogeneous good with constant marginal costs. Consumers search sequentially with perfect recall for the lowest price. One class of consumers, called shoppers, have zero search costs, while all other consumers have a positive search cost, c. There is a unique symmetric Nash equilibrium price distribution with the property that it changes smoothly from "marginal cost pricing" when all consumers are shoppers and/or c = 0 and "monopoly pricing" when no consumers are shoppers. Remarkably, as the number of stores increases, the Nash equilibrium becomes more monopolistic. Copyright 1989 by American Economic Association.
We develop a general model of search market equilibrium with heterogeneous buyers and sellers. This framework unifies previous models with one-sided heterogeneity and clarifies many of their special properties. It easily accounts for price dispersion, active search, and the matching of buyer and seller types. It also extends to repeat purchases, once we embed it into a dynamic game with incomplete information. We formalize the inferences and strategies underlying equilibria where firms charge constant prices and customers patronize them loyally. We establish a general correspondence between such equilibria and single purchase markets. Journal of Economic Literature Classification Numbers: D83, L13.
Recent Patterns in Antibiotics Pricing
- Sara Ellison
- Fisher
Ellison, Sara Fisher. "Recent Patterns in Antibiotics Pricing." Manuscript.
Cambridge: Massachusetts Inst. Tech., September 1997.
Go Figure! National Association of Chain Drug Stores Criticizes Federal Report on Drug Acquisition Costs
- Michael F Conlan
Conlan, Michael F. "Go Figure! National Association of Chain Drug Stores
Criticizes Federal Report on Drug Acquisition Costs." Drug Topics 140 (October
7, 1996): 108.
Louis: Mosby Year Book
- Mosby 's Genrx
Mosby's GenRx. 8th ed. St. Louis: Mosby Year Book, 1998.
Essentials of Pharmacy Management. St. Louis: Mosby Year Book
- Dennis H Tootelian
- Ralph M Gaedeke
Tootelian, Dennis H., and Gaedeke, Ralph M. Essentials of Pharmacy Management.
St. Louis: Mosby Year Book, 1993.
Retail Pharmacy Practice Management
Retail Pharmacy Practice Management. Chapel Hill, N.C.: Nat. Assoc. Retail
Druggists, 1989.